How to deal with the plutocrats

By Felix Salmon

January 4, 2011

Chrystia Freeland has a long essay on the new global elite in the Atlantic, which will eventually become her next book. It's well timed to coincide with the self-congratulatory plutocratic gabfest that is Davos, which kicks off in three weeks' time, and with which Chrystia is very familiar.
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Chrystia Freeland has a long essay in the Atlantic on the new global elite, which will eventually become her next book. It’s well timed to coincide with the self-congratulatory plutocratic gabfest that is Davos, which kicks off in three weeks’ time, and with which Chrystia is very familiar.

The difference between the new global elite and the old global elite is that today the world is owned and run largely by first- or second-generation money: people who tend to think that they’ve earned it, somehow, especially if they came to their wealth from a background in the lower-middle classes:

While you might imagine that such backgrounds would make plutocrats especially sympathetic to those who are struggling, the opposite is often true. For the super-elite, a sense of meritocratic achievement can inspire high self-regard, and that self-regard—especially when compounded by their isolation among like-minded peers—can lead to obliviousness and indifference to the suffering of others…

When I asked one of Wall Street’s most successful investment-bank CEOs if he felt guilty for his firm’s role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford. One of America’s top hedge-fund managers made a near-identical case to me—though this time the offenders were his in-laws and their subprime mortgage. And a private-equity baron who divides his time between New York and Palm Beach pinned blame for the collapse on a favorite golf caddy in Arizona, who had bought three condos as investment properties at the height of the bubble.

It’s not that these people are utterly bereft of noblesse oblige: Chrystia points out that “in this age of elites who delight in such phrases as outside the box and killer app, arguably the most coveted status symbol isn’t a yacht, a racehorse, or a knighthood; it’s a philanthropic foundation.” But those philanthropies don’t benefit the left-behind middle classes: they tend to follow a barbell distribution, with the money going either to the world’s poorest or else to well-endowed universities and cultural institutions. The US middle class is sneered at for being fat and lazy and unworthy of their wealth:

The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”

This mindset is dangerous, but it’s not clear how dangerous it is.

The real threat facing the super-elite, at home and abroad, isn’t modestly higher taxes, but rather the possibility that inchoate public rage could cohere into a more concrete populist agenda—that, for instance, middle-class Americans could conclude that the world economy isn’t working for them and decide that protectionism or truly punitive taxation is preferable to incremental measures such as the eventual repeal of the upper-bracket Bush tax cuts.

Mohamed El-Erian, the Pimco CEO, is a model member of the super-elite. But he is also a man whose father grew up in rural Egypt, and he has studied nations where the gaps between the rich and the poor have had violent resolutions. “For successful people to say the challenges faced by the lower end of the income distribution aren’t relevant to them is shortsighted,” he told me. Noting that “global labor and capital are doing better than their strictly national counterparts” in most Western industrialized nations, ElErian added, “I think this will lead to increasingly inward-looking social and political conditions. I worry that we risk ending up with very insular policies that will not do well in a global world. One of the big surprises of 2010 is that the protectionist dog didn’t bark. But that will come under pressure.”

If this is true, then the members of the super-elite should be falling over each other to pay more in taxes out of simple enlightened self-interest—rather than saying that a perfectly sensible tax hike is “like when Hitler invaded Poland in 1939.”

But it seems to me that the inchoate anger of the masses shows no sign of cohering into anything at all, let alone protectionism, which seems to have been dying a slow death ever since the protests against Nafta. The Tea Party, which is the closest thing we have to a populist revolt, is bought and paid for by plutocrats and shows no protectionist tendencies whatsoever. If they keep on going on their present trajectory, they’re just as likely to continue unimpeded as they are to run into some kind of atavistic class warfare.

So I’m unconvinced that the plutocrats have any real incentive to restrain themselves, or to stop moaning around an Upper East Side dinner table that $20 million a year isn’t all that much—it’s really only $10 million a year, after taxes.

And I’m also unconvinced that we actually need the plutocrats as much as Chrystia says we do:

Not all plutocrats, of course, are created equal. Apple’s visionary Steve Jobs is neither the moral nor the economic equivalent of the Russian oligarchs who made their fortunes by brazenly seizing their country’s natural resources. And while the benefits of the past decade’s financial “innovations” are, as Volcker noted, very much in question, many plutocratic fortunes—especially in the technology sector—have been built on advances that have broadly benefited the nation and the world. That is why, even as the TARP-recipient bankers have become objects of widespread anger, figures such as Jobs, Bill Gates, and Warren Buffett remain heroes.

And, ultimately, that is the dilemma: America really does need many of its plutocrats. We benefit from the goods they produce and the jobs they create. And even if a growing portion of those jobs are overseas, it is better to be the home of these innovators—native and immigrant alike—than not. In today’s hypercompetitive global environment, we need a creative, dynamic super-elite more than ever.

I would put this another way. The Silicon Valley mega-wealthy are good for the US economy, but they’re not going anywhere: Silicon Valley hasn’t managed to reproduce itself elsewhere in the US, let alone anywhere else in the world. When it comes to US plutocrats, however, most of them are very similar to the Russian oligarchs who seized their country’s natural resources — they’re bankers and hedge-fund managers who seized their country’s financial resources. They produced no goods, and they created no jobs — quite the opposite. And so it makes sense for Americans who have lost their jobs and their hope to reclaim those financial resources, through mechanisms like a wealth tax or a financial transactions tax. The Silicon Valley elite would happily pay such things. And if the angry bankers went off to destabilize some other financial system, they wouldn’t actually be missed.